The SBA and PROvision

Provision

pruh-vizh-uhn

 

- the activity of supplying or providing something

- a store or supply of something (especially of food or clothing or arms) -a stipulated condition; a clause in a legal instrument, a law, etc., providing for a particular matter -the cognitive process of thinking about what you will do in the event of something happening

 

from Latin pro, meaning “forward, outward,” and vidēre “to see, observe, take care.”

 

Thus, its meaning is “to see or act forward.”

 

Provision can also describe the planning you do for "when something happens."

 

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TIP OF THE WEEK

 

SBA borrowers should provision for interest rates being higher than they thought.

 

Effective August 1st, the maximum variable interest rates for all 7(a) loans is now:

 

$350,001 and greater:    PRIME + 3%

$250,001 - $350,000:     PRIME + 4.5%

$50,001 - $250,000:      PRIME + 6%

$50,000 or less:         PRIME + 6.5%

 

Most SBA 7(a) loans adjust on a calendar quarterly basis.

 

Prolix profligate promulgations proliferate over variable interest rates.

 

Because 7(a) loans are fully amortizing over long terms, increases in interest rates do not dramatically increase the monthly payment.

 

For example, a $100,000 SBA loan with a variable rate of PRIME plus 3.00 resulting in an interest rate of 7.75% amortized over 10 years would have a monthly payment of  $1,200.

 

If interest rates rise another 1% resulting in a rate of 8.75% the monthly payment is $1,253, an increase of only $53.

 

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Indices:

PRIME RATE= 4.75%

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SBA 504 Loan Debenture Rate for July

For 20 year debentures, the debenture rate is only 3.81% but note rate is 3.87% and the effective yield is 5.05%.

For 25 year debentures, the debenture rate is only 3.93% but note rate is 3.97% and the effective yield is 5.11%.

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AHEAD OF THE YIELD CURVE

 

I don’t see anyone provisioning for WIN buttons in the fight against inflation.

 

Whip Inflation Now (WIN) was a 1974 attempt to spur a grassroots movement to combat inflation in the US, urged by U.S. President Gerald Ford.

 

Ford had taken office in August 1974 amidst one of the worst economic crises in US history.

 

Despite rate hikes increasing the federal funds rate by 6 percentage points, from 4.8 percent to 10.8 percent, inflation continued to rise until December 1974, when it reached a peak of 12.3 percent.    The economy had also slid into a recession.

 

President Ford rolled out the WIN button campaign and by mid-November, orders for WIN buttons passed the 15 million mark. It was the best-selling button since 1971, when more than 50 million smiley face buttons were sold.

 

By the first half of 1976, the inflation rate was down to 4.6 percent.

 

The Federal Reserve meets next week on monetary policy.

 

At its last meeting, they stated “that ongoing increases in the target range will be appropriate.”

 

Eurodollar futures settle at a three- month lending rate that has averaged about 22 basis points more than the Fed's target over the past several decades.

 

A Eurodollar by the way is simply a U.S. dollar on deposit in commercial banks outside of the United States.

 

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:

 

DEC22- 3.87

DEC23- 3.19

DEC24- 2.83

DEC25- 2.81

DEC26- 2.87

 

What does all this mean?

 

I don’t know.

 

The December 2022 implied rate is now at 3.87% up from 3.67% just last month and up from only 0.17% in October.

 

The fed funds target rate is currently 1.50% to 1.75%.    Fed funds futures for December 2022 imply a fed funds rate of 3.51% consistent with the prognostication from the Eurodollar futures market.

 

At last week’s auction of 30 year Treasury bonds, the high yield was awarded at 3.115 percent, down 7 basis points from last month's auction rate. Lower long-term rates reflect diminished long-term inflation expectations as the growth outlook has cooled.

 

We may not need to pull out the WIN buttons after all.

 

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OFF BASE

 

Ford’s top economic adviser, Alan Greenspan, later described the WIN idea as “unbelievable stupidity.”

 

In November, reporters spotted what looked like a distress signal from White House press secretary Ron Nessen, who wore his button upside down. It spelled NIM.

 

Nessen said it stood for “No Immediate Miracles.”